Stock Exchange Trading System (SETS)

Definition

The Stock Exchange Trading System (SETS) is an order-driven electronic trading system used by the London Stock Exchange (LSE). It was introduced in 1997, effectively replacing the earlier quote-driven trading system. SETS streamlines the process of buying and selling securities by allowing market participants to enter orders that are automatically matched by the system, resulting in efficient price determination and seamless handling of transactions. It covers the FTSE 100 and FTSE 250 index stocks and other blue-chip securities.

Examples

FTSE 100 and FTSE 250 Trading: A leading investment firm utilizes SETS to execute large-volume trades of FTSE 100 index stocks. The electronic system matches buy orders with sell orders in mere milliseconds, ensuring the firm can effectively manage its portfolio.
Retail Investor Using SETS: An individual investor places an order to purchase shares of a blue-chip company through their broker’s platform. The broker routes this order to SETS, which finds a matching sell order, processes the transaction, and records the trade.
Market Makers on SETS: A market maker in the London Stock Exchange uses SETS to continuously provide liquidity. By entering quotes for buying and selling prices, they ensure smooth processing of buy and sell orders for investors.

Frequently Asked Questions (FAQs)

What is the Stock Exchange Trading System?

SETS is an order-driven electronic trading system used by the London Stock Exchange that matches buyers’ and sellers’ orders for efficient execution and settlement of trades.

When was SETS introduced?

SETS was introduced in 1997, replacing the previous quote-driven trading system on the London Stock Exchange.

What kind of securities are traded on SETS?

SETS handles the trading of FTSE 100 and FTSE 250 index stocks as well as other blue-chip securities.

How does SETS determine the price of a trade?

The price is determined through automatic matching of buy and sell orders entered by market participants. The resulting price is then recorded and used for transaction settlement.

What is an order-driven trading system?

An order-driven system is one where the prices and transactions are determined by matching orders from buyers and sellers rather than by market makers quoting buy and sell prices.

FTSE 100: A stock market index representing the 100 largest companies listed on the London Stock Exchange by market capitalization.
FTSE 250: An index representing the 250 largest companies on the London Stock Exchange outside of the FTSE 100.
Blue Chip Securities: Stocks from large, financially sound, and well-established companies with a reliable performance record.
Order-Driven System: A trading system where transactions are executed by matching buy and sell orders placed by participants.
Market Maker: A firm or individual that provides liquidity to the markets by continuously quoting both buy and sell prices.

Online Resources

Suggested Books for Further Studies

“The Complete Guide to Investing in the Stock Market” by Henry Feldman
“Market Efficiency: Stock Market Behaviour in Theory and Practice” by various authors
“The Intelligent Investor” by Benjamin Graham
“Mastering the LSE” by Nicholas Parsons
“Electronic and Algorithmic Trading Technology: The Complete Guide” by Kendall Kim

Accounting Basics: “Stock Exchange Trading System (SETS)” Fundamentals Quiz

### What is the primary function of SETS? - [x] To automatically match buy and sell orders entered by market participants. - [ ] To manually record all trade transactions in a ledger. - [ ] To provide investment advice to retail investors. - [ ] To buy and sell government bonds. > **Explanation:** SETS is designed to automatically match buy and sell orders, greatly streamlining the trading process on the London Stock Exchange. ### Why was SETS introduced in 1997? - [x] To replace the previous quote-driven system. - [ ] To introduce cryptocurrency trading. - [ ] To handle only government securities. - [ ] To limit market access to institutional investors. > **Explanation:** SETS was introduced to replace the previous quote-driven system, thereby improving the efficiency and speed of trade executions. ### What types of securities are primarily traded on SETS? - [ ] Government bonds. - [ ] Real estate. - [x] FTSE 100 and FTSE 250 stocks, and other blue-chip securities. - [ ] Commodities. > **Explanation:** SETS focuses on trading FTSE 100 and FTSE 250 stocks as well as other blue-chip securities. ### How are prices determined in the SETS system? - [ ] By manual negotiation between traders. - [ ] By stock brokers in the trading pit. - [x] Automatically by matching buy and sell orders. - [ ] Through government regulation. > **Explanation:** In SETS, prices are automatically determined by matching buy and sell orders entered into the system. ### Which specific market does SETS primarily operate on? - [ ] New York Stock Exchange. - [ ] Tokyo Stock Exchange. - [x] London Stock Exchange. - [ ] Hong Kong Stock Exchange. > **Explanation:** SETS is the electronic trading system for the London Stock Exchange. ### What kind of trading system is SETS? - [x] Order-driven system. - [ ] Quote-driven system. - [ ] Hybrid system. - [ ] Auction system. > **Explanation:** SETS is an order-driven system, where prices are determined by matching buy and sell orders. ### What replaced the older quote-driven system at LSE? - [ ] High-Frequency Trading (HFT). - [ ] Blockchain Trading System (BTS). - [x] Stock Exchange Trading System (SETS). - [ ] Custom Orders Matching System (COMS). > **Explanation:** The quote-driven trading system was replaced by SETS in 1997. ### Who benefits from the efficient matching of orders in SETS? - [ ] Only institutional investors. - [ ] The government. - [ ] Only retail investors. - [x] All market participants including institutional and retail investors. > **Explanation:** All market participants benefit from the efficient matching of buy and sell orders in SETS. ### What makes SETS different from a quote-driven system? - [ ] It is used only for large-cap stocks. - [ ] It requires manual entry of transactions. - [x] It uses an electronic system to automatically match orders. - [ ] It restricts trading to set hours of the day. > **Explanation:** SETS utilizes an electronic system to automatically match buy and sell orders, unlike the manually intensive quote-driven system. ### What security indexes does SETS cover? - [ ] Nikkei 225 and Dow Jones. - [ ] S&P 500 and DAX. - [ ] Hang Seng and CAC 40. - [x] FTSE 100 and FTSE 250. > **Explanation:** SETS covers securities included in the FTSE 100 and FTSE 250 indexes, among other blue-chip stocks.

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